The FINANCIAL — “Georgia now has one of the most liberal business environments, but it is not yet a place where doing business (as opposed to registering a business) is actually easy. Among the key problems are access to finance, qualified labor, small market size and independence of the judiciary,” the authors of the recent report National Competitiveness – Georgia by ISET, financed by USAID believe.
“It seems logical to start with reforms that have economy-wide effects, such as law and order, improvements in general infrastructure and broad liberalization measures implemented by Georgia in 2004-2006. The aim of the new Georgian administration should be to create the conditions for investments in low-risk-low-return activities, such as manufacturing, in order to take productivity improvements and economic growth to new levels.” The authors add.
Overall, considering the 2005-2012 period, Georgia has become one of the biggest improvers in GCI.
When looking at GDP statistics, Georgia’s growth did not create enough jobs, leaving more than 50% of the working age population in low-productivity subsistence farming, un- or under-employment. Many former industrial workers saw their human capital depreciate over the previous decade and left the labor force. The incidence of unemployment is particularly high among youth, many of whom have spent five or more years acquiring a university degree but lack the professional skills demanded by the market. The result has been political uncertainty and risk, which, in turn, translated into unfavorable country credit ratings and high lending interest rates, further slowing down investment and job creation in the non-agricultural sector.
“There is lack of domestic savings, Georgia’s ability to increase its capital stock remains dependent on foreign investment. Yet, FDI has decelerated considerably after 2008, in the wake of the internal political standoff, the August 2008 war with Russia, and the global financial crisis. Georgia was able to compensate for the lack of foreign investment by borrowing abroad at deeply concessionary rates, as well through technical assistance, foreign aid and remittances. The resulting capital account surplus has helped finance investment in public infrastructure and current consumption (imports of goods and services). However, while alleviating current account deficits in the short run, these capital inflows are no substitute for foreign direct investment in the manufacturing, energy, tourism or agribusiness sectors that could improve the country’s technological base and boost its export potential. Attracting foreign investors should thus be another top priority for the new Georgian administration. Doing so will require strong steps to improve the administration of justice and property rights protection, on the one hand, and assure potential investors that there will be no reform reversals in such key areas as land ownership, labor code and competition law, on the other”, reports says.
“As a small country on a crossroads between Asia and Europe, the only way in which Georgia can promote its international competitiveness is by opening up to the rest of the world and cooperating with its neighbors, Russia included. The general point is that one of the easiest and least costly ways for Georgia to increase its competitiveness and market size is to further reduce trade and transaction costs with its neighbors. In this way, and by prioritizing investment in essential pieces of trade and logistics infrastructure, Georgia could leverage its convenient location and “Doing Business” ranking to assume the much-coveted role of a regional hub”, according to ISET report.
Main recommendations are:
Georgia’s agriculture stands out on the above list of potential priority sectors given its social and political significance. While there is evidence for private sector’s ability to internalize coordination externalities, we see strong justification for government action targeting untapped agricultural land and labor resources. Such action is justified given the urgent need to reduce social and political risks stemming from rural un- and under-employment. In designing interventions, the government should be fully cognizant of the recent experience with ill-conceived, disruptive and wasteful interventions at the micro-level. Instead of ignoring private sector interests and competing with private agribusinesses, the government should promote, and work with, business associations and large businesses that have ability to resolve coordination failures plaguing Georgia’s agriculture.
Tourism and the hospitality industry. Despite what seems like phenomenal growth in the number of foreign arrivals to Georgia (about 30% per annum), the tourism industry suffers from classical coordination failures related to threshold and scale effects. To inject significant capital into the sector, private investors have to be assured of minimum demand, which Georgia’s major touristic destinations cannot guarantee. The result is a vicious circle which the previous administration tried to undo by investing in public infrastructure, such as, water, rail, road and air communications; creating special touristic zones along the Black Sea shore, establishing the Gudauri Development Fund, and engaging international donors and businesses in the development of Batumi, Mestia, Tskhaldubo and other touristic sites.
Hydroelectric energy. Georgia does have significant hydropower potential, however it is not at all clear that the outgoing government’s strategy of gearing this potential towards exports to Turkey justifies massive capital outlays and environmental impacts. Georgia can benefit from increased hydrogenation capacity and cross-border trade in energy, yet it should also make sure that at least some of these gains are passed onto domestic consumers and producers. By lowering the domestic price of energy Georgia’s will create the incentives for private investment in energy-intensive export-oriented manufacturing activities – a far more promising avenue for future productivity growth and competitiveness.
Transport and trade logistics. The currently observed levels of public and private investment in the BTK rail project and many other pieces of transport, trade and logistics infrastructure are indicative of the great promise of this sector for Georgia as a gateway to and from the vast landlocked Central Asian region. Georgia is of course only a small part of the cargo route connecting Central Asia, Azerbaijan and Armenia to the Black Sea, Turkey and the EU market. Spanning many natural and artificial (political) barriers, this route is in need of coordinated investments by all the parties involved.
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